Sir Ronald Cohen: private capital for the public's benefit

This is part of The Globe and Mail's in-depth look at the evolution of philanthropy. Read more from the series here.

Sir Ronald Cohen, the 66-year-old billionaire financier considered the godfather of social finance, is the founding chair of Big Society Capital, the pioneering investment agency created by British Prime Minister David Cameron. With the summer's civil unrest clearly on his mind, Mr. Cohen met The Globe and Mail during a recent visit to New York to explain how and why he became dedicated to the idea of harnessing private capital for the public's benefit.

Why did you decide to turn down the role of permanent chairman of Big Society Capital?

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My difficulty at the moment is that I'm trying to ride two race horses, if you like, which both require a lot of effort. One is social investment. The other one is the economic drivers of peace in the Middle East. I was born in Egypt, left as a refugee at the age of 11 and I've always had it in my mind to try to do something helpful to solve this conflict.

So the difficulty for me was not in staying involved with Big Society Capital, but in leading it as chair – it's actually the only reason; otherwise I feel absolutely passionately about this. And I think it's a sad reflection of the way in which we have tackled social issues that we find violence in the streets.

In 2002, I made a speech in which I praised all of the progress that we'd made in the direction of entrepreneurship and growth, but warned that a curtain of fire would come to divide rich and poor if we didn't focus on social issues in a different way, if we didn't give back.

And it's very worrying, actually, to see the violence that we've seen in the U.K. because, at the end of the day, it springs in great part from a feeling that society's unfair. There are vandals who then jump on the bandwagon and loot and rob for the sake of it.

But you've got to maintain a sense that society is equitable, even if as the gap between rich and poor grows, even as you realize that you've got to have low tax rates if you're going to provide incentives for risk-taking and growth of the economy and a faster improvement in people's standards of living.

Do you see the unrest as a comment on Big Society?

No, I think the people in the streets didn't even know of the Big Society project. I don't think it has to do with this particular approach. I do think it has to do with feelings that you've been left behind, that others have progressed and you've been unfairly left behind.

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And whether it's ... in poorer areas in developed countries, or whether it's in emerging countries, you've got to maintain the social fabric, which basically means a sense of being treated fairly. And I think it's that that has broken down.

How did you first seize on the notion that the market could be used to address social problems?

I come from the private equity world and obviously I had become quite expert in the use of financial instruments and also in entrepreneurship. And in 2000, I got a phone call from the Treasury saying, "Look, we're very concerned because even though the average standard of living keeps rising, the gap between rich and poor gets bigger and bigger. And will you have a fresh look at what we should be doing about issues such as poverty?"

And I immediately accepted because I had become aware of the fact that this phenomenon was occurring, and it was clear to me that, while we were providing great opportunity for everybody to make great wealth, you had to use something more powerful than the tools we traditionally used, which were philanthropy and government, basically.

So it's really in working on the Social Investment Task Force in 2000 that I discovered that there was a real opportunity to develop social investment as opposed to philanthropy, and to develop it into an asset class which would be capable of attracting significant capital from the markets. And that really the challenge, if we were going to deal with social issues effectively, was to create part of our system which deals with the social consequences of the system as opposed to the economic, business and financial consequences.

When you were pioneering venture capital and private equity, I think you used the United States as a model. Was there a model that you used when you started looking at social finance?

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No, I really hadn't found a model for it, but it emerged from all of the discussions that we had with different groups in the United States, in Britain and elsewhere who were trying to deal with social issues. So, in the United States there were social venture funds, there was the New York Venture Fund, which had been set up by private equity firms basically. But the models were still based around philanthropy, and I think instead of trying to make philanthropy more efficient, we've been working in Britain over the last decade more to try to develop social investment as a complement to philanthropy.

How do you pitch investors on the merits of social finance and get the market to buy into the idea?

Well, it's early days. And there's only been over the last 10 years a relatively small set of initiatives which have proved the proposition that you can achieve financial and social returns at the same time. So, I took a decision, with others who are now leading it, to create Bridges Ventures in 2002, which would be a private equity firm that focused on investment in the poorest 25 per cent of Britain, and which would seek to achieve returns which would be roughly half of those of the traditional mainstream venture-capital industry.

We went out to persuade investors that they could make 10 to 12 per cent on their money, net of fees, instead of the usual 20 to 25, and at the same time achieve a significant social return by investing in the fund. It was very hard work to persuade pension funds and banks and wealthy individuals who had set up charitable foundations to invest in this. But the returns came in at 15 to 20 per cent on that first fund, instead of 10 to 12, and so it began to wake people up a bit.

But the biggest breakthrough really came, I think, with the development of the social impact bond. The first one was launched in September of last year.

Tell me more about that.

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I think the social impact bond is a crucial step in persuading the banks that this really can become a significant asset class. It enables not-for-profits to develop a revenue model and to raise capital from the markets. We approached the British government, the Ministry of Justice, and said, "Look, we're prepared to raise money – in the event we raised ₤5-million ($8-million) – to deal with the issue of youngsters who are in prison before the age of 21 and who re-offend, 60 per cent of them, within a year. This is a major problem across the world.

We agreed to focus on Peterborough Prison near Cambridge University. And the deal with the government was this: We will fund not-for-profits specialized in helping freed prisoners to find jobs and get psychological support to cope with all the challenges that arise when you come out of prison. If we fail over the six- to eight-year life of the bond to reduce the rate of re-offending by 7.5 per cent, then the capital of the investors is lost. If on the other hand we succeed, the government will repay the bond and pay a yield of 2.5 to 13 per cent. According to our calculations, government pays out one-third of the saving.

So governments thought this was worth doing. And it gives these organizations money for several years to achieve these results, but even more importantly the prospect – if they achieve social returns – of going back to the capital markets and raising money again.

We've never had that before. Social impact bonds could really become the way in which the financial markets become involved in dealing with social issues.

Whether it's the U.K., the U.S., Canada or elsewhere, what are the major hurdles that must be overcome?

You need government to play an enabling role. Today, if you want to issue social impact bonds, the governments are going to be the commissioners. You need, for instance, a pool of commitments that can be made by government departments. And unless government plays that enabling role, government departments aren't going to be able to sign up. The big stumbling blocks have to do with the role of government.

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